Floating a Tender - Assignment Example

Services Project Management Assignment 2 2 or s of goods and services depend on the procedure of procurement to complete their projects, and enter into contracts to ascertain timely and qualitative delivery of goods and services. There are some significant differences in the methods of procurement employed by the private and the public sector, mainly because of different scales of risk assignment and process transparency. As a general rule, public projects have a better specifications and design requirement package in place before the beginning of procurement. As a result, it is in the interests of the client (the government) to exercise the option for open tendering. Public projects in general require a much higher degree of transparency during the procurement and the project execution stage as they are liable to oversight management, and a lack of personal involvement between the customer and the bidder brings out the most competitive pricing from each bidder. This can also be recognized as a total lack of transparency between the bidders, and that suits the client perfectly. The disadvantage in public projects is the often insufficient perception of potential pitfalls and showstoppers during the procurement process, as interaction and discussion prior to bidding is discouraged. As a result, some public projects fall prey to extensive and numerous design and specification changes, ruining their original time and cost estimates. Such projects are allowed to meander along as all involved tend to keep within the strict purview of their job description within the overall governmental framework, not willing to say or do anything to either rock the boat or to steady it. Such projects are orphaned very quickly, with a chronological propensity towards non-accountability. On the other hand, private sector procurement is made with a firm eye on deliverables, and technical vetting of bidders and a bidding process is less important than the need to get a contractor who will deliver in time to spec. Transparency is variable, especially if the contract is negotiated, as the ability and competence of the contractor is beyond dispute, and educating him about the project adds value. Private sector procurement also goes the open tender route, depending on the most suitable procurement mechanism for the particular project. The strongest case for open tenders is made by case for equal opportunity and enhanced transparency in such procurement, whereas a deeper understanding of the project and a stronger tendency to adapt to change characterizes the negotiated tender, making it popular with the private sector. A solution that offers is a hybrid of both styles of procurement, and works across the board for projects of any scale, complexity and ownership, is the process of procurement that consists of competitive tendering in one or two stage, followed by negotiations with the chosen / lowest bidder. However, such a technique is effective only if the chosen bidder is not aware of his status as the lowest, so as to keep him willing to negotiate. This technique is followed in public as well as private sector projects. Stage 1 is known as technical bid (open tender stage), followed by Commercial bid (negotiation stage). 2.2 The process of procurement is a series of exchanges between the client and the contractor, with an increasingly high level of exactness and clarity on conditions of contract, culminating with the actual execution of the contract. A contract consists of three parts, Offer, acceptance and consideration. Although Estimate, Quote and Tender are terms commonly used, there are distinct differences between the three. An estimate is the contractor's perception of the cost or a particular amount of work, and is approximate. It is prepared after taking a preliminary look at the work that is required to be done. An estimate may be prepared by a contractor or by the client on the basis of the bill of Quantities, to arrive at a rough cost of the project. It is not technical in nature, and is based on assumed specification. A quote is a formal offer to do a certain amount of work for a certain price, and necessarily includes all terms and conditions according to which the project shall be executed. A contractor can be held to his quotation in a court of law, not to his estimate. It is reasonably technical in nature, and is priced off design drawings and specification documents. A tender is a more elaborate set of documents, made for relatively larger and more complex projects, consisting of a bill of quantities, all design drawings and specifications, special conditions, general specifications, the contract document itself, and any other special terms and conditions that warrant their presence and contractor's concurrence. These may include guidelines for worker safety, medical and safety considerations to be followed on site among others. Tenders usually request the contractor to include a list of plant and machinery to be committed to the project, details of organizational setup on site and a list of price/unit of basic materials to be used on site. A tender, when signed by client and contractor is a legally binding agreement, and is essentially a complete contract. Conclusion: An estimate is an approximation, and may be assumed as inaccurate. A quote may be accepted and work awarded as a fixed price contract or as a cost plus fee, if specifications and design are complete and unlikely to change. A tender however gives the client an opportunity to modify and change a project, thereby offering both parties to the contract several avenues of renegotiation of parts of the tender if the need arose. The biggest practical advantage of using the process of tendering as a tool for procurement is the ability to map deviations from the original design within the mutually agreed structure of the contract. 2.3 The decision to float a tender with or without quantities depends on several factors including design completion, built-in flexibility, and the nature of the project. The differences between a tender with quantities and a tender without are contractual incompleteness. Contracts without quantities are also known as quantity flexibility contracts. These contracts are used in two broad situations. Firstly, where the contract has been formalized without design finalization, and second, where there are items within the contract for which there is no way of knowing the quantity before the work actually starts. An example of the latter being projects where substantial substructure work needs to be done, and the quantity of excavation type is unknown. In such a situation, the contractor would be asked to give rates for both 'excavation in rock' and 'excavation in soil'. A contract without quantities basis assigns almost all risk on the contractor, as he does not know what scale of project he is bidding for. In such a situation, a set of specifications and drawings may be given to the contractor, and each may estimate the total amount the product would cost, and give rates accordingly. The quantities and rates thus provided by the contractor would be the basis for 'provisional sum' that would form the basis for all deviations in the future. A contract with quantities has the advantage of a more equitable risk assignment between the client and the contractor, provides a relatively complete picture of the cost of the project after the contractor fills in the rates, and provides a basis to quantify changes in any parameter during the project. It also allows the project team to analyse the project and therefore try and value engineer to control costs. A contract without quantities, allows a client to exercise complete flexibility in terms of amount of work to be executed, and such a method shifts the onus of accuracy on the contractor. Unlike a contract with quantities, one without quantities can be prepared much earlier in the design process, and necessarily needs a sheet of specifications for any valid quote. Schedule of rates have become a very popular tool to execute Measured Term Contracts, and have several advantages even in the tendering process. A standardised schedule of rates allow an equitable base for tendering from all bidders, for cost plus contracts, as the project cost is constant and firm, with negotiations on only components charged by the contractor. This reduces unforeseen costs to the client for the project, while keeping flexibility in execution open. Schedule of rates also allow a high degree of control over labour contracts, as the contractor cannot transfer labour costs to the material costs or vice versa in a quote to increase margins. Day rates are a comprehensive pricing mechanism for the human component of a project, where the cost of manpower committed to a project by the contractor can be enumerated. This allows the contractor to understand his labour cost component accurately, and reduces cost for the client, while helping the contractor keep the project costs slim. If the labour component of a project is defined, a project can be reverse priced to maximise productivity from the available worker pool. Day rates would be applied to small and medium scale projects and to all cost plus fee projects. Day rates however do not factor in non-employment costs like administration, supervision etc. 2.4 The tender amount as a sum of material and labour cost is an incomplete summation of total cost of a project. From the moment that a contractor decides to bid on a contract, he begins to spend money on the project, irrespective of whether he actually gets the project. Considering the labour and material costs as basic or 'core' tender costs, there are several costs that have to be factored into a tender, whether within the core as a percentage, or as a part of added terms and conditions. Failure to do us invariably results in a negative outlook during the project execution, or in a worst case scenario, can result in the whole contract becoming an onerous process. The costs begin with the fees that may be paid to purchase the tender documents, and the subsequent personnel and office costs to fill the tender and submit it. Further,a contractor may be asked to do some preliminary groundwork on faith, like surveying of the site, marking and/or fencing of the site, and costs incurred in showing of project sites to the client and therefore travel and entertainment costs thus accumulated. Contractors may also be asked to make a deposit as earnest amount to show the seriousness of their bid. This amount may be refundable after project award but is usually forfeited. Other payments include a bank guarantee to the client, as a security deposit, as also a certain percentage of the tender amount as 'retention amount' that is reduced by the client from each running bill, and is paid only as the end of the defect liability period. The on cost of this is the loss in interest from the amount, as also the reduced working capital available to the contractor during the project and for a certain period beyond. Other costs that are to a contractors' account but not always a part of the contract due to their highly variable nature, are: Administrative expenses. Cost of on-site employees like site supervisor, junior Engineer. For larger projects, these costs can be justifiable added to the contract as an amount, but in small but complicated/ convoluted projects, the need may not be foreseen. Contractor's expense on setting up site office Cost of loans to purchase new equipment, and the loss of interest on these amounts. Costs in procuring permissions, whether legal costs or otherwise. All the above costs are rarely quantified by a contractor before bidding for a project. It is also observed that those contractors who do foresee these costs and bid accordingly, lose out as their bids are higher. As a result, a client may prefer to go for a contractor who has not accommodated these costs, even at the cost of problems later. It is better to have these costs quantified, or at least mentioned in the contract documents, so as to place a negotiated value to them, rather than resolve issues arising out of a lack of foresight by last-minute expenses that are not controlled. Another advantage of the former plan of action is that the contractor's image and brand value in the mrket can be leveraged to reduce such costs, especially on loans and permissions. A small developer may find banks more willing to loan money for a project if the contractor has a good track record. Prior to submission, a few tools can be employed to make the tender continually relevant and profitable. These tools include a plus and minus cost clause, where a deviation in market price of materials beyond a certain percentage from that on the day of the tender submission is paid for by the client (in case of appreciation) and credited to the client (in case of depreciation in price. A simpler version is an escalation clause, where a certain percentage of price escalation is absorbed by the contractor, beyond which the client pays the difference. Contractors with access to large amounts of working capital buy material with increasing prices in bulk, making money by billing the client for the difference after escalation occurs. This works only if the price difference of escalated price is more than the interest lost on that amount of money. Clients prefer the plus and minus clause, with a more equal risk distribution. Other tools include project delay compensation and project abandonment compensation (very relevant in the current real estate scenario). In general, contractors tend to be more competitive in a recessionary market and less competitive during a building boom. A contingency sum is a percentage of the total tender amount that is added to a tender or is considered as an inviolate amount by a contractor to compensate for unforeseen cost changes to the project. It is an amount that may be used to pay for items / expenses that cannot be billed by the contractor under any head in the tender. Contingency amounts are usually shown as a separate item, and clients themselves by and large approve of the concept as it reduces expense-related shocks later in the project. Contingency amounts do not find formal mention in most building projects, but are a standard feature in most fit-out and interior projects, where specifications and item details that therefore costs tend to change much more frequently. A detailed breakdown of tender price, also known as a 'rate analysis' is extremely beneficial to clients. This concept is not readily embraced by all contractors, as it usually involves divulging the revenue model of a project from his perspective, but may be required for very cost-sensitive components of large projects, and if a cost break-up is a pre-condition for bidding on a project. The largest advantages in terms of value for money and transparency are accrued in fixed-price, cost plus and design-build contracts. Read More